Vendors of businesses often focus on the amount they are selling their business for and forget about other important details that should be worked through before any contractual sale documents are drawn up between the parties. While you want to achieve the best price you can you also want to ensure the expectations of the purchaser in respect of the transaction are managed carefully, and this includes dealing with items such as vendor assistance, business turnover warranties and tax considerations. Prudentia Law can provide invaluable assistance given that not only do we have the legal knowledge, but we also have an in-depth background in tax and accounting issues as well, that will assist you with the review process. Prudentia Law can assist you with putting together your sale and purchase agreement, and the following are a good starting point for discussion:

  • Price – What price do you want to receive? Remember, before settling on any price you should carefully consider what the net position you will be left with will be. This includes taking account of debt repayments, security release obligations, income tax liabilities from the sale and also final wash-up payments to employees and suppliers which will all have an impact on the net amount you receive.
  • What is the price made up of? The sale of the business’s tangible fixed assets is likely to create a taxable income to you as the vendor from depreciation recovered. Therefore, the value placed on these is important at the negotiation stage. On the flip side, the sale of most intangible assets, especially good will does not normally create taxable income to you from the sale. The value of any stock which you are selling is also important because this sale value will impact what taxable profit you make on such stock when compared against the opening stock value you have for those items. Therefore, you can see that the lower the value you place on the tangible assets and the stock, the better the end position for you from a tax perspective from the sale of the business.
  • GST – Is the price GST inclusive or exclusive? As a starting point for all vendors, we would stress that your contract should always be worded as “plus GST if any”.
  • Settlement Date – What date is suitable for you to hand over the business? If there are things that you as the business owner need to tidy up for the eventual settlement of the sale, make sure you have sufficient time to do so. Handling the transition for employees of the business can be a time-consuming process, so a reasonable time frame should be set for that before settlement.
  • Lease – Are you organising for the assignment of a lease for the business premises? If so, you need to take account of the liaising with the landlord (and their lawyers) that will be required.
  • Turnover Warranty – Have you provided the purchaser with financial information or marketed the business with reference to actual sales figures? If so, by including a turnover warranty that reflects those representations, you need to ensure that those details reflect the true position. Otherwise, the purchaser may have comeback on you if those representations turn out to have been misleading.
  • Minimum Stock Percentage – If you are concerned that the value of the stock may need more accurate calculation by way of a formal stock take and you want to have some control over not just handing over stock to the purchaser which you may not be getting true value for, then include details in the minimum stock percentage area of the agreement.
  • Restraint of Trade – Preferably you probably do not want to be restrained from opening future businesses, but normally a purchaser will want some comfort in having you at least being restrained to some extent. You should attempt to limit the restraint of trade parameters in the agreement as much as possible.
  • Vendor Assistance – Does the purchaser want you to provide them with assistance in the business after you have sold? If so, you should clearly indicate in the agreement the specific assistance you are willing to give them. This could include details as to a number of hours assistance, type of assistance given and whether there will be any remuneration for assistance over-and-above that.
  • Employees – Are there employees who the purchaser will be taking up contracts with? If so, care needs to be taken in the transition of these employees. Also, you need to carefully calculate each employee’s entitlements in terms of pay, holiday pay and any other financial obligations you may have to them under their contracts (such as redundancy pay) because these costs will need to be paid out of the proceeds of sale.
  • Buy-Back Option – Have you considered whether your contract has an option to buy the business back off the purchasers if they do not succeed into the future? This can often be an invaluable clause in your contract if you still have ongoing lease obligations to your landlord which will continue after you have sold the business.